When the funding well runs dry...

THERE is more bad news for entrepreneurs hoping to raise cash from venture capital firms - unless they are in healthcare or information technology.

The number of firms winning venture capital investment in 2002 slumped dramatically on the previous year, according to figures from accountant and business adviser Ernst & Young and information provider VentureOne.

Only 288 deals between companies and venture capital firms were completed last year, compared with 514 in 2001. The value also dropped, from about £2bn to less than £1bn.

Most of the businesses that won new funding were in the IT sector, encompassing software, communications, electronics and semiconductors, or healthcare, including biopharmaceuticals, healthcare services and medical services. Though the number of deals was down in both sectors, the IT sector completed 165 deals, accounting for more than half of all deals, while healthcare, with 56, accounted for nearly a fifth.

Stuart Watson, a partner at Ernst & Young, says: 'Deals with software companies far outnumbered any other sector and activity in the IT industry as a whole has held up well.

'Though the number of deals is down by about half,

we are seeing a normal number of investments in this sector. The high number of deals in previous years was abnormal.'

Richard Shearer, 38, is chief executive of Empower Interactive, a City-based software provider to the telecoms industry. Founded three years ago, the company raised £8m in a third round of venture capital funding in August.

Shearer says: 'We didn't expect it to be easy to raise more cash as venture capitalists analysed us much more rigorously than when we started. It is a much longer and more challenging process now, but we approached it aggressively by getting a lot of solid information together on the company.'

Watson says that many venture capital funds have a lot of cash to invest in the right businesses. He says: 'There is still a huge sum of money in the pot, though there is now a shift away from early-stage businesses to later stage deals. This year we expect more deals using more new money.'